Man is an animal suspended in webs of significance that he himself has spun...

Tuesday, July 31, 2012

FATCA: Backpedaling on Reciprocity

The story continues and it just gets better and better. For those of you just joining the conversation, the story, which is just now starting to make headlines, is about the implementation of an American law called FATCA (Foreign Account Tax Compliance Act). Back in 2010 the U.S. Congress had a brilliant idea: tired of spending time and energy chasing down alleged American tax evaders in foreign countries, they decided to force those foreign countries to turn over the account information of all Americans at home and abroad who have accounts with local banks in places like Shanghai, Tokyo, Paris, London, Buenos Aires and Tel Aviv. The bill was signed into law on March 18, 2010 by President Obama and the fun began almost immediately with foreign governments signaling their deep displeasure at being coerced into doing the American government's dirty work.

We can have different opinions about the original intent of the law (some people think it's a fine idea) but what is clear today as we stand on the verge of it actually being implemented, is that it was poorly written, has all kinds of unintended consequences, and U.S. politicians simply didn't have the courtesy (or common sense) to ask beforehand if other countries were OK with this. Most weren't.

The U.S. Congress can pass any law it likes but they didn't stop to think about why any country would agree to force its own banks to spend millions (if not billions) of dollars/Euros/Yen re-tooling their information systems and chasing down American account holders if there isn't anything in it for them? And as the law was written, there wasn't any benefit to them. Not one. Even worse, it was potentially quite harmful to their own interests since the costs of implementation are to be borne by their own citizens in the form of higher banking costs .

Enter the notion of "reciprocity." OK, said some foreign countries, we see what you're trying to do and in principle we agree that this is a good idea. After all, we have our own problems chasing down our own "exilés fiscaux" and we need revenue just as badly as you do. So here's the deal: If we have to report on Americans holding accounts in our country, then we want to know about our citizens holding accounts in the United States.

Now, it's pretty hard to argue with that and the Obama administration didn't even try - FATCA simply won't work unless the U.S. is willing to offer other countries some incentives for compliance and they've made it pretty clear that they want reciprocity in return for their cooperation.

A few months ago a step was made in this direction; the U.S. Treasury Department issued new rules (not a law, mind you) that would require U.S. banks to give those foreign governments what they want. Starting next year U.S. banks would be required to disclose the accounts of foreigners with money invested (and earning interest) in the U.S. The U.S. will then trade those lists for the lists of American account holders in other countries. Sounds simple enough but, alas, is anything in U.S. domestic politics "simple" these days?

These U.S. Treasury regulations sparked a perfect storm of protest in the U.S. and there is reason for concern here. The U.S. is very welcoming of foreign investment and has shielded foreign account holders (other countries' tax evaders) for years. The fear of many American politicians like U.S. Senator Marco Rubio (Florida) is that foreigners will start taking their money out of the U.S. as a result of this regulation because they don't want their home countries knowing about their banking activities in the "land of opportunity." In this press release he called it, "a job-destroying mandate that would encourage billions of dollars to flee Florida’s economy."

Rubio and other U.S. politicians are right that these new regulations are going to be a disaster for the U.S. economy. This article from a U.S. newspapers reports that the threat alone of disclosure is having an impact already in the state of Florida:

“Since April 19 [when the regulation was passed], we’ve heard that several hundred million dollars have left Florida for foreign jurisdictions,” said David Schwartz, executive director of the Florida International Bankers Association. “Customers have said ‘we’re aware of what’s going on, and we prefer to take our money overseas.’”

Some U.S. banks (those with a large number of foreign investors who pull out of the U.S.) might actually fail as result. If that happens the American taxpayer will pick up the bill since the U.S. government guarantees the deposits in those banks.

If all that weren't bad enough, U.S. banks are waking up to just how onerous compliance will be and how this information exchange is liable to be much worse for U.S. banks versus foreign banks. A German, Chinese or French bank under FATCA is only going to required to report on U.S. citizens and Green Card holders, but under the new domestic regulations a U.S. bank will have to report on the account holders of, let's say, 20 or more different countries. This means they must find out the citizenship information of all their account holders and upgrade their information systems. This will be outrageously expensive and the costs will of course be assumed by the American account holders at those banks.

But here's the crux of the problem: How can the U.S. have FATCA be a success without implementing domestic regulations that give foreign governments the information they want in exchange?

Well, U.S. politicians are certainly trying to wiggle out of this dilemma. A few days ago the U.S. House of Representatives (the folks that voted for FATCA in the first place) passed a bill that would suspend these new U.S. Treasury regulations (and all others) until such a time as the U.S. unemployment rate drops from 8.2% to 6%. Until that welcome (but unlikely in the near future) event occurs, there will be no reciprocity with foreign governments with respect to FATCA.

This bill is not yet law since it still has to pass in the U.S. Senate. No matter. The mere fact that they passed this extra-territorial legislation, FATCA, in the first place without taking into consideration the impact on foreign countries and their citizens (not to mention attempting to force foreign governments and their domestic banks into compliance and let's call that what it is, imperialism) and that they are now trying to kill reciprocity because they now perceive a threat to American interests in all this, well, that is just sheer hypocrisy.

Allow me to go one step further here. Thanks to the Isaac Brock Society and Just Me's excellent Twitter feed, I've been following closely the media reports on FATCA and from where I sit, the American people (the "homelanders") seem to think that FATCA is a brilliant idea.

Fine. But here's the deal: If we (the 6 to7 million Americans abroad and the unknown number of Green Card holders abroad, and most importantly, all the citizens of all countries outside the U.S. who are impacted directly and indirectly by this legislation) are going to suffer then I think Americans in the homeland should suffer too. Time for them to show their solidarity for this worthy cause by accepting all the unintended consequences of FATCA even if it: costs U.S. jobs, loses foreign investment, drives American banks to fail, obliges every American to pay higher banking fees, discourages foreign companies and banks from doing business with U.S. citizens, and (the cherry on the cake) helps bump the U.S. economy back into recession.

It just wouldn't be fair otherwise, now would it?

(More information and a lively discussion about the House measure and the fallout of FATCA on Americans homelanders can be found here at the Isaac Brock Society).

See, you didn't need my help! Nicely written. I would probably only quibble with a very small detail, but won't bother you with it, as it does not distract from the fine narrative which is very readable for the non wonks. I have added it to my "DATCA is not Dead" thread at Isaac Brock.

I assume you have seen the new Press Release by Jatras prn.to/M2jPSk with the letter from the 4 Senators to Geithner. bit.ly/OBwoFi Must reads. :)

What a convoluted idea to post-date the enactment of a terrible bill to the unemployment rate. The house could pass something this significant without it going to the senate? Frankly, I don't think they can backtrack fast enough or strongly enough on this embarrassing and unthoughtful act of imperialism.

Hi anonymous, Couldn't agree more. I suspect that tying this bill to the unemployment rate was an attempt to assure other countries that"yes, we do plan on reciprocity some time in the future but not right now..."Interesting message and one that other countries could echo. It infuriates me though that the impact of FATCA on other countries was never taken into account by U.S. lawmakers. Not the best way to make friends and influence people. :-)